On CEO Compensation and Public Response to Those Egregious Pay Packages…


The compensation advisory industry experienced real growth and penetration of corporate suites when a fellow named Graef Crystal was on the consulting side, growing a company that now is one of the three our four major compensation advisory organizations. CEO compensation apparently got so out of control in Mr. Crystal’s view that he switched sides, becoming a very vocal critic of out-of-control pay in the late – 1980s and through the 1990s. He was headlined often in Fortune and other publications and was one of the early canaries-in-the-coal-mine on mismatched pay issues (comp vs. performance).


You will find his excellent commentary on Bloomberg — Web athttp://www.bloomberg.com/news/commentary/crystal.html  “Thain Finds $64 million Pay Oasis at Merrill” and “Prince Shows its Not So Good to be The Prince” (at Citi) are two recent headlines.


The folks at The Corporate Library have also been at this game a long time — do you remember / have you heard of The Lens Fund? TLC grew out of the very capable research efforts of that investment fund. Under the able direction of corporate governance reform pioneers Robert Monks and Nell Minow, the Lens team launched the first round of shareholder challenges at companies where overpaid CEOs at way-underperforming companies were leading share prices down, down, down — that led to dramatic changes at the top (Sears, now Kmart and Westinghouse, now Viacom – CBS, for example) and for a time, brought about real reforms in some company pay practices. A few attempts at reform, anyway. It took the more recent corporate scandals and passage of Sarbanes-Oxley and new SEC disclosure rules to kick the reform can down the road some more. A ways, anyway. Apparently there is a long, long way still to go.


So watch for vigorous 2008 shareholder challenges to overpaid CEOs and C suite execs at underperforming companies. (“Pay for Pulse,” Lens/TLC’s Nell Minow has in the past characterized outsize pay at underperforming firms. Measurement? Stock price, usually, and return for owners.)


And watch for intensifying focus on the compensation advisory companies — they are in somewhat of the same leaky PR boat that credit rating agencies are now. (You know, the folks who gave high fives to patched together packages of subprime loans destined to go belly up and screw both homeowners and investors, and create turmoil in the capital markets here and abroad.)


The comp advisory folks come in, often hired by senior management, to tell the board that management is underpaid. OK, they don’t exactly say it that way. But if you were on a board, and had hired this “star” to drive profits and lead the organization to greatness…would you feel good about him (usually a him) being paid in the bottom quartile? Second to the bottom quartile? Lower than his peers? (Uh, uh, don’t look at marketplace return at the comparable companies — this is about the competition to pay more than the competition.)


Like Garrison Keiler’s folks in Lake Wobegon, where all the children are above average in intelligence, isn’t our CEO worthy of top quartile pay (if compared to peers he’s a star)? Of course! Maybe the solution to all this is to figure out how to get everyone in the top quartile and zero out the bottom three or four groups’ names and rankings. What is a quartile worth, anyway, other than to leverage up the pay package at some firms?


Or, maybe we can get board comp committees to directly hire and supervise and carefully question the exec comp advisors — and ask for help in designing pay-for-performance packages that really do reward those outstanding CEOs and top C execs who drive shareholder value up the charts. That would be good for advisors, too, because they would step back from this market where the seller (CEO) often tells the buyers (the hiring board) what the price will be…only place in the auction market process where this may be happening?


Self-regulation and voluntary reform of practices is usually better than government reform and rules and oversight. There’s still time in 2008, corporate directors.


What are your thoughts on CEO compensation? Are we communists and philistines when we attack overpay for underperformance? When we address CEO pay issues at all? It’s a free market after all…or is it? Well, remember that a good number of employee pension funds utilizing indexes cannot step away (the Wall Street Walk) from companies that have egregious pay practices. So — action is needed — and has been evident in “Say on Pay” investor coalition challenges. (After all, it really is the investors’ and their beneficiaries’ monies stuff in some pay packages.)


Stay Tuned to Proxy Season 2008 and the “Say on Pay” and other initiatives of shareholders fed up with some (underline: some, not all) corporate pay schemes. The media is ready to pounce on the tales of high-paid CEO stars. The new SEC rules (“CD&A – Compensation Disclosure and Analysis”) are in effect for the second year now and lots of numbers have been crunched for the 2008 contests. Expect many more headlines…


Hank Boerner


Editor, Accountability Central



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